Willamette Valley Vineyards, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 22, 2018. The company produces and sells premium Oregon wines through direct-to-consumer and distributor channels. FY comparisons are to 2016. The filing includes fourth-quarter sales data but does not provide clear quarterly profit or cash-flow values.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $20.85 million | $19.43 million |
| Gross profit / margin | $12.88 million / 61.8% | $12.22 million / 62.9% |
| Operating income | $3.64 million | $4.17 million |
| Net income | $2.99 million | $2.63 million |
| Income applicable to common shareholders | $2.29 million | $2.17 million |
| Diluted EPS after preferred dividends | $0.46 | $0.43 |
| Operating cash flow | $2.51 million | $3.09 million |
| Cash at year-end | $13.78 million | $5.71 million |
- Net sales rose 7.4%; retail sales increased 17.5%. Produced-wine case sales were nearly flat at 134,600 versus 134,700.
- Gross margin declined as lower-yield-vintage wines carried higher per-case costs, obsolete inventory was written down, and distributor sales faced more promotional discounting. SG&A rose 14.8%, contributing to a 12.8% drop in operating income.
- Net income increased despite lower pretax income, principally because the tax provision fell to $453,000 from $1.48 million. The 2017 provision included a $758,000 deferred-tax benefit from remeasuring deferred tax liabilities after federal tax reform; the effective tax rate was 13.1%, versus 36.0%.
- Investing cash outflow was $3.92 million, mainly vineyard development and property and equipment. Financing cash inflow was $9.48 million, largely preferred-stock proceeds and debt refinancing. Inventory increased $2.82 million and reduced operating cash flow.
- Working capital was $24.0 million and the current ratio 4.73. The company had no borrowings on its $2 million revolving credit line at year-end; the facility was due to expire in July 2018.
- Year-end debt included approximately $7.20 million of Farm Credit Services debt, plus notes payable of approximately $1.90 million. Fixed-rate Farm Credit loans bear 4.75% and 5.21%; the company reported compliance with its debt covenants. Total contractual obligations were $13.79 million, including grape payables and operating leases.
- Direct-to-consumer sales accounted for approximately 40% of net sales, up from 36% in 2016; distributor sales made up the balance. A single distributor represented 18.2% of 2017 revenue.
Material changes and outlook
- Fourth-quarter net sales were $5.95 million, compared with $5.86 million in Q4 2016. The filing does not give clear Q4 profit or cash-flow figures.
- Direct sales growth and wine-club expansion supported revenue: the company reported 7,050 wine-club memberships, up by 336 from 2016. Direct sales generally earn higher margins than wholesale sales.
- The company planned to bottle approximately 153,300 cases in 2018, versus 151,332 produced in 2017, and said available bulk inventory was sufficient for that plan. Management expects cost of sales as a percentage of sales to decline over coming years as higher-yield vintages are released.
- Management planned vineyard development, including approximately 42 acres in 2018 and 10 acres in 2019; it expected already-planted preproductive acreage to begin bearing within one to three years. These are plans, not guaranteed outcomes.
- The company continued expansion and brand development, including Pambrun, Elton and other vineyard projects. It bought approximately 38 acres near Carlton, Oregon, in January 2018, after year-end.
- Federal alcohol-tax changes effective in 2018 reduced certain wine excise rates and provided production credits for two years, through 2019. The company said the provisions could lower excise-tax liability; rates and credits may revert if not extended.
- Series A redeemable preferred stock issuance generated $8.28 million net proceeds in 2017. Preferred stock carries a cumulative 5.3% dividend rate ($0.22 per share annually), ranks ahead of common stock, and may be optionally redeemed after June 1, 2021 under specified terms. Preferred dividends paid in 2017 totaled $704,000. No common dividends are anticipated in the foreseeable future.
Risks, contingencies and unusual items
- Agricultural exposure includes weather extremes, harvest-time rainfall, disease and pests. Tualatin vineyards are affected by phylloxera; the company is gradually replacing affected areas with resistant vines. The company also depends on purchased grapes and cannot meet anticipated production needs solely from its own vineyards.
- Competition, distributor dependence, promotional pricing, consumer demand, and possible increases in alcohol taxes or regulation could pressure sales and margins. The company’s common stock is described as thinly traded.
- Cash from operations has historically not covered all funding needs, making access to credit important. The company warned that covenant breaches, inadequate credit availability, or failure to renew its credit line could harm operations.
- The 2017 preferred-stock financing and debt refinancing materially increased cash and financing inflows. Net income also benefited from a one-time deferred-tax remeasurement benefit; operating income was lower.
- No material legal proceedings were pending, and management reported no material litigation contingency. The financial statements received an unqualified audit opinion. Management stated disclosure controls and internal control over financial reporting were effective; the auditor did not provide an opinion on internal controls.
Important facts for investors to verify
- Whether the $13.78 million cash balance, preferred-stock proceeds and planned vineyard spending translate into sustainable operating cash flow, given $2.51 million of 2017 operating cash flow and rising inventory.
- Renewal or replacement of the $2 million credit facility before its July 2018 expiration, and ongoing compliance with debt covenants.
- Whether the 2018 bottling plan and future higher-yield vintages improve unit costs and gross margins, while accounting for grape-purchase costs and inventory write-down risk.
- How preferred-stock growth, annual cumulative dividends, liquidation preference and potential post-2021 redemption affect common shareholders and future cash requirements.
- Exposure to the major distributor and the company’s ability to grow higher-margin direct sales without continued outsized SG&A increases.